LNG
Feature Articles
Evolving Carbon-Neutral LNG
May 2021
In the global energy industry, natural gas is considered the “bridge fuel” to a low-carbon future. Industry participants and some policymakers have touted the benefits of natural gas as a climate-friendly substitute for more carbon-intensive fuels, such as coal. However, this has been increasingly challenged, as the natural gas industry faces growing pressure from investors, regulators, and customers to do more to help meet climate change objectives and ESG goals.

Decarbonizing LNG Cargoes

Carbon-neutral LNG involves offsetting the carbon emissions from the LNG supply chain through the purchase of carbon offsets. Carbon neutrality can only be achieved through the offsetting of product lifecycle emissions, or all the emissions associated with the production, transportation, and use of a specific product.

Based on the Greenhouse Gas Protocol, which is the most widely used accounting standard, lifecycle GHG emissions can be divided and measured according to three ‘scopes’ (Scope 1, 2 and 3):

  • Scope 1 emissions are direct emissions from owned or controlled sources. 
  • Scope 2 emissions are indirect emissions from the generation of purchased energy. 
  • Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions. 

Decarbonising LNG cargoes enhances the environmental competitiveness of the LNG market and allows producers to sell a differentiated and premium product that is attractive to buyers looking for an LNG cargo with environmental added value.

 

Carbon-Neutral LNG Trades

The first carbon-neutral LNG cargo was traded in 2019 when Tokyo Gas and GS Energy bought a carbon-neutral LNG cargo from Shell. Under the terms of this trade, the seller committed to the removal of carbon emissions generated from the entire value chain covering Scope 1, 2, and 3. 

Since then, other energy companies have announced additional deals with different stipulations, such as partial offsets of certain activities i.e. end-user combustion as opposed to lifecycle offsets. The decision to trade a lifecycle or partial carbon-neutral LNG transaction is driven mainly by the buyers’ requirements and the seller’s capabilities.

In recent trades, Cheniere Energy supplied its first carbon neutral LNG cargo to Shell in Europe in March 2021 from its Sabine Pass facility, under an offtake agreement. The carbon offsets cover the entire CO2 equivalent emissions of the cargo, from production to use by the consumer so it covers Scope 1, 2 and 3.

Cheniere set out plans earlier this year to provide emissions data for each cargo to its customers. It will offer cargo emissions tags in the first half of 2022. The company has produced more than 1,525 LNG cargoes as of the end of April, or around 105Mt. According to DEFRA (UK Department for Environment, Food and Rural Affairs) calculations on LNG emissions, this represents 360Mt of CO2 equivalent emissions.

In March, Woodside Petroleum sent what is announced was the world’s first carbon-neutral condensate cargo from its Pluto LNG facility to global trader Trafigura. The carbon offsets covers Scope 1 and 2. 

European majors have been tentatively exploring carbon-neutral LNG since 2019. Tokyo Gas which imports Australian LNG, on-sold a carbon-neutral cargo in 2020.  The company is also a junior partner in the Pluto LNG facility.

 

 

Challenges Determining Lifecycle Emissions

Determining the product lifecycle emissions for an LNG cargo is challenging, given the diversity in upstream technology, transportation methods, and downstream use cases. The decision about which parts of the supply chain should be offset depends on negotiation and on the structure of the deal, which will determine the buyer and seller’s relative responsibility for supply chain emissions.

Integrated LNG sellers have a comprehensive view of the emission profile of the value chain since they own and control the upstream gas supply, the liquefaction plant, and the marine terminal.  The use of a tolling model, whereby the LNG seller is responsible for sourcing feedstock gas from upstream producers, can make quantifying and measuring emissions more challenging due to the lack of overall control.

 

Reducing or Offsetting GHG Emissions

The Green LNG market is nascent and the “Green” in Green LNG refers to either reducing greenhouse gas (GHG) emissions or offsetting GHG emissions associated with some or all of the LNG value chain – from upstream gas production and pipeline transportation, through to liquefaction, ocean transport, regasification, and downstream use of the natural gas.  

Companies in the LNG value chain can reduce GHG emissions in a number of ways, including using biogas for feedstock, reducing emissions from upstream, pipeline, and liquefaction facilities, using renewable energy to power their liquefaction facilities, and using carbon capture, utilization, and storage (CCUS) technologies.  

LNG sellers can offset their GHG emissions by purchasing offsets to compensate for all or part of their GHG emissions or engaging directly in activities that offset GHG emissions (e.g., afforestation or reforestation, or investment in renewable energy). 

A number of factors will drive an LNG seller’s decision whether to reduce or offset GHGs from some or all of the LNG value chain, including the degree of control the LNG seller has over the various parts of the value chain.  

Many US LNG sellers do not own or control the gas supply upstream of the LNG liquefaction facility.  As a result, such a seller cannot itself reduce GHG emissions from upstream operations.  However, the seller may be able to contract with its upstream suppliers to measure, reduce, and verify GHG emissions.  

A universally accepted framework focusing on the monitoring, reporting, and verifying of emissions across all stages of the LNG supply chain would increase accuracy and promote acceptance in the industry. The industry is working on bringing such a framework to market as demand and growth expectations for carbon-neutral LNG cargos continue to build.

 

LNG Emissions Monitoring and Measurement

Until a universal methodology is agreed, public reporting tools have been used to illustrate the approximate emissions resulting from LNG operations and therefore the number of offsets required to achieve carbon neutrality.

On average, the product lifecycle emissions of a conventional LNG cargo (175,000 cubic meters) are generally estimated at around 250,000 tonnes of CO2 equivalent. This amount can vary depending on various factors such as the source of the LNG, the type of liquefaction technology, the vessel used to transport the LNG, or the equipment and procedures in place at the regasification terminal.

The CO2 equivalent emissions can be derived using the following DEFRA conversion rates to calculate LNG emissions needed to be offset for Scope 1, 2 and 3. According to the 2020 DEFRA conversion rate:

  • 1 tonne of LNG emits approximately 3.42 tonnes of CO2e across the value chain, including end use.
  • End use refers to fuel combustion, which comprises about 2.54 tonnes of the total 3.42 tonnes of well-to-wheel emissions.

The remaining emissions of 0.88 tonnes are across the value chain from exploration and production to transportation, storage and regasification

 

 

Growth Potential

  • While carbon-neutral LNG is still at an embryonic stage, the market has the potential to grow and become more liquid.
  • Growth will be driven by corporate climate goals, environmental regulatory environment, and access to financing.
  • Regulatory requirements will reinforce the focus on GHG emissions from the LNG supply chain. The Covid-19 crisis and the growing awareness of both customers and investors are also accentuating interest in sustainability and the demand for low carbon operations.
  • Suppliers and buyers are therefore voluntarily using offsetting solutions to maintain the value of their product and even build a competitive advantage, making LNG a premium product and a differentiation factor.
  • In this context, “carbon neutral” LNG trade achieved through emission offsetting mechanisms is becoming more frequent regardless of the level of LNG prices.
  • Quantifying and certifying emissions from the LNG supply chain is a challenging task. To this end, the implementation of a sound and universally accepted monitoring reporting and verification system is necessary. It will require cooperation between sellers and buyers and efforts from both sides to avoid delaying its development.
  • LNG trade has experienced strong growth over the last decade and AME forecasts that global LNG demand is set to double by 2040. Nevertheless, concerns about climate change requires drastic carbon reduction efforts from the natural gas sector to sustain the expected rapid growth rate.